Buying a Business in Costa Rica: The Labor Liabilities Foreign Buyers May Inherit

Buying a business in Costa Rica can appear safer than starting from the beginning.

The company already has:

• Employees
• Customers
• Suppliers
• Licenses
• Equipment
• Operating procedures
• Historical revenue
• Local management

The buyer may believe the existing workforce is one of the assets being acquired.

It can also be one of the transaction’s largest hidden liabilities.

Employees may have years of accumulated seniority. Workers presented as independent contractors may legally be employees. Salaries reported to the Costa Rican Social Security Fund may not match the amounts actually paid. Vacation records may be incomplete. Overtime may have been handled in cash. Housing, meals or vehicle use may form part of compensation even though the seller excluded them from payroll.

The buyer may not discover these problems until after closing, when:

• An employee is terminated
• A worker files a complaint
• The CCSS conducts an inspection
• A workplace accident occurs
• The buyer restructures payroll
• Employees compare the old and new working conditions
• The seller is no longer available or financially capable of paying

Labor due diligence must therefore examine more than the current monthly payroll.

The real question is:

What employment obligations has this business accumulated, and who will be responsible for them after the transaction closes?

Buyers should also conduct a broader review of the legal, financial and operational condition of the target. Our guide to due diligence for business acquisitions in Costa Rica explains the other documents and liabilities that should be examined before closing.

The Expat Database also provides a broader introduction to performing due diligence when buying a business in Costa Rica, including the review of employee contracts, debts, tax compliance, supplier arrangements and other transaction risks. (The Expat Database)

Buying a Business in Costa Rica Does Not Automatically Eliminate Labor Liabilities

A purchase agreement can allocate responsibility between the buyer and seller.

It cannot automatically eliminate employee rights or prevent public institutions from enforcing obligations against the legally responsible employer.

The buyer must distinguish among:

• Buying shares in the existing employer
• Buying assets without acquiring the legal entity
• Continuing the same business through a new entity
• Taking over some or all existing employees
• Terminating and rehiring workers
• Replacing the seller’s contractors with employees
• Acquiring property that includes household or maintenance staff

The transaction structure affects the analysis, but no structure should be assumed to eliminate labor exposure automatically.

Share Purchase: The Employer Remains the Same Company

In a share purchase, the buyer acquires ownership interests in the existing Costa Rican company.

The company itself generally remains the same legal person before and after closing.

If that company is the employer, its historical obligations remain with it.

The buyer may therefore acquire a company that already has exposure involving:

• Unpaid wages
• Overtime
• Vacation
• Aguinaldo
• Commissions
• Notice and severance
• Misclassified contractors
• Unregistered employees
• Underreported salaries
• CCSS debt
• INS deficiencies
• Workplace injuries
• Labor litigation
• Protected employees
• Collective obligations
• Salary-in-kind claims

The seller may agree to indemnify the buyer for pre-closing matters, but the company still faces the employee or institutional claim.

The buyer’s practical remedy may be a contractual claim against the seller after the company has already paid or defended the labor matter.

That remedy is valuable only when:

• The indemnity is properly drafted.
• The seller remains solvent.
• The seller can be located.
• The claim falls within the agreed scope.
• Notice procedures were followed.
• The survival period has not expired.
• The buyer can prove the loss.
• Funds remain available to satisfy the indemnity.

A share purchase therefore requires a close examination of the entire employer history, not only a review of current staff.

Asset Purchase: Labor Exposure Can Still Follow the Operation

In an asset purchase, the buyer may acquire:

• Real estate
• Equipment
• Inventory
• Contracts
• Intellectual property
• Customer lists
• A trade name
• Licenses or permits where transferable
• Operating assets

The buyer may use a different company and assume that historical employment obligations remain entirely with the seller.

That conclusion may be too simple when the buyer continues the same economic operation with the same workforce.

Costa Rican law protects existing employment relationships when there is a substitution of employer.

Article 37 of the Labor Code states that employer substitution cannot affect existing employment contracts to the employee’s detriment. It also provides that the former and new employers are jointly responsible for obligations arising before the substitution for six months, after which responsibility remains with the new employer.

The buyer should therefore analyze the economic and operational continuity of the business rather than relying only on the legal form of the purchase agreement.

What Is Employer Substitution?

Employer substitution, or sustitución patronal, generally concerns a change in the person or entity operating as employer while the employment relationship and economic operation continue.

Relevant facts can include:

• Transfer of essential operating assets
• Continuation of the same business activity
• Retention of employees
• Same workplace
• Same customer base
• Same equipment
• Same trade name
• Similar management structure
• No genuine interruption in employment
• Continuation of the employees’ ordinary duties

The existence of one of these facts does not necessarily decide the issue.

The overall continuity matters.

The Ministry of Labor and Costa Rican legal authorities have treated Article 37 as protecting the continuity of existing employment contracts when an employer is replaced.

What Happens to Employee Seniority?

When employment continues through an employer substitution, the buyer should not assume that seniority restarts on the closing date.

Historical seniority may remain relevant to:

• Vacation
• Notice
• Severance
• Other seniority-based benefits
• Internal policies
• Contractual rights
• Collective benefits

For example, an employee may have worked at a hotel for 12 years before the hotel’s operating assets are purchased.

If the employee continues performing the same job for the continuing hotel operation, the buyer should not automatically calculate future termination obligations as though employment began at closing.

The employee’s original service date may continue to control.

The Six-Month Joint-Liability Period

Article 37 provides that the substituted employer remains jointly responsible with the new employer for pre-substitution obligations for six months.

After that period, responsibility remains with the new employer.

This rule is frequently misunderstood.

It does not mean:

• All historical obligations vanish after six months.
• The employee loses prior seniority.
• The buyer is safe once six months pass.
• Only claims filed during the first six months matter.
• The seller alone remains responsible for pre-closing labor problems.

The practical effect can be the opposite.

During the statutory period, the employee may have two responsible employers for qualifying historical obligations. After that period, the new employer may remain responsible.

The buyer should therefore use the six-month period as a reason to preserve transaction security—not as a countdown to immunity.

Common Expat Mistake: “We Are Buying the Assets, Not the Company, So We Do Not Inherit the Employees”

The contract label does not always control the employment outcome.

When the buyer takes over:

• The same workplace
• The same operation
• The same employees
• The same equipment
• The same services
• The same customer relationships

the facts may support employer substitution and continuity.

The buyer should review the workforce before deciding that the transaction is free of historical labor exposure.

Should the Seller Terminate Everyone Before Closing?

Buyers sometimes require the seller to:

• Terminate every employee.
• Pay a complete final settlement.
• Obtain signed receipts.
• Have the buyer rehire selected workers after closing.

This can be useful in some transactions, but it is not an automatic cure.

The buyer must evaluate whether the termination is real or merely a paper interruption.

The Friday-to-Monday Problem

Assume that the seller terminates employees on Friday.

The buyer rehires them on Monday.

The employees:

• Report to the same workplace
• Perform the same duties
• Use the same equipment
• Serve the same customers
• Continue under similar supervision
• Experience no meaningful break in service

A court may examine whether the employment relationship was genuinely interrupted or whether the parties attempted to erase seniority while continuing the same operation.

A final payment may help demonstrate that accrued amounts were addressed, but it does not necessarily settle every continuity question.

The buyer should not rely on a weekend gap as the only evidence of a new relationship.

Article 29 and Immediate Work for Another Employer

Article 29 of the Labor Code states that severance must be paid when the legal conditions apply even if the worker immediately begins serving another employer. It also limits ordinary statutory cesantía to the final eight years under the current framework.

That provision reinforces the need to separate two questions:

• Whether the seller properly paid a termination obligation
• Whether the employee’s service legally continued for other employment purposes

A transaction should not assume that payment alone settles every possible continuity issue.

When Termination and Rehiring May Be Appropriate

A seller termination and buyer rehire may be useful when:

• The old business is genuinely ending.
• The seller pays every accrued amount.
• Employees receive accurate settlement statements.
• The buyer makes genuinely new offers.
• Duties or business structure materially change.
• There is a real transition between operations.
• Records clearly distinguish the relationships.
• The parties obtain advice on continuity risks.

The buyer should still consider whether employees will argue that seniority continued.

When Retaining Employees May Be Better

Continuity may be more practical when:

• The workforce is essential to business value.
• Employees have specialized institutional knowledge.
• Immediate interruption would harm customers.
• The operation is clearly continuing.
• The transaction price already accounts for labor exposure.
• The buyer receives sufficient escrow and indemnity protection.
• Employee relations would be damaged by artificial terminations.
• Existing contracts are commercially acceptable.

The objective should not be to erase rights through paperwork.

It should be to understand, price and allocate the real employment obligations.

Hidden Workforce Risk: Unregistered Employees

Many small Costa Rican businesses do not have a clean separation between formal payroll and informal labor.

The seller may maintain:

• Registered employees
• Cash-paid helpers
• Family members performing regular work
• Workers labeled as temporary
• Contractors working like employees
• Staff paid through another company
• Part-time workers omitted from payroll
• Undocumented seasonal workers
• Domestic staff working partly for the business

A payroll list may therefore be incomplete.

Do Not Rely Only on the Official Employee List

The buyer should compare the seller’s employee list against:

• People physically working at the premises
• Organizational charts
• Work schedules
• Access-control logs
• Company email accounts
• WhatsApp groups
• Vendor and contractor lists
• Electronic invoices
• Bank transfers
• Cash withdrawals
• Uniform or equipment records
• Customer-facing materials
• Interviews with management
• Tax and accounting records

The purpose is not merely to identify names.

It is to determine who actually performs recurring work for the operation.

Why Unregistered Workers Are Dangerous to a Buyer

An unregistered worker may claim:

• A much earlier start date
• Higher salary
• Longer working hours
• Unpaid overtime
• No vacation
• No aguinaldo
• No INS coverage
• Unpaid notice and severance
• Employee status despite contractor treatment

The buyer may have little evidence to challenge the claim because the seller kept no reliable records.

If the buyer continues employing the person, the worker’s relationship may become easier to prove while the historical period remains disputed.

Independent-Contractor Misclassification

A contractor list should receive the same attention as the employee payroll.

High-risk contractors often include:

• Administrative personnel
• Sales representatives
• Tour guides
• Property managers
• On-site managers
• Maintenance workers
• Reception staff
• Bookkeepers
• Drivers
• Marketing staff
• Restaurant personnel
• Farm supervisors
• Customer-service representatives

The buyer should assess whether each person actually operates an independent business.

Our guide to employee or independent-contractor classification in Costa Rica explains how control, personal service, fixed schedules, recurring compensation and operational integration can indicate an employment relationship.

Contractor Red Flags

A contractor presents increased employment risk when the person:

• Works a fixed schedule
• Reports to a manager
• Performs a permanent internal role
• Uses company systems and equipment
• Works mainly for the target
• Cannot send a substitute
• Receives a fixed recurring payment
• Requires permission for time off
• Is presented publicly as company staff
• Has served the business for years

Invoices and professional-services agreements do not override employment-style reality.

Quantifying Contractor Exposure

For each high-risk contractor, estimate possible historical liability involving:

• CCSS contributions
• Aguinaldo
• Vacation
• Overtime
• Holiday pay
• Notice
• Severance
• Commissions
• Workplace-risk coverage
• Salary in kind

The buyer should also determine whether the contractor will be:

• Retained as a genuine service provider
• Converted to payroll
• Replaced
• Terminated before closing
• Included in a negotiated settlement

Do not wait until after closing to decide.

CCSS Due Diligence

CCSS compliance is one of the most important parts of labor due diligence.

The buyer should determine:

• Whether the target is registered as an employer
• Whether it is currently reported as patrono al día
• Whether contribution debts exist
• Whether collection arrangements exist
• Whether workers are omitted
• Whether salaries are underreported
• Whether commissions and bonuses are included
• Whether related entities carry part of the payroll
• Whether inspections or administrative proceedings are open

The CCSS provides public mechanisms for checking employer delinquency and operates systems through which employers manage payroll and contribution matters.

“Patrono al Día” Is Necessary but Not Sufficient

A current certificate or public result showing no recorded delinquency is important.

It does not necessarily prove that:

• Every worker was registered.
• Every start date was accurate.
• Every salary component was reported.
• Contractors were classified correctly.
• No inspection is pending.
• No future assessment will arise.
• No undeclared cash payroll exists.

A company can be current on the amounts it reported while still having underreported the real payroll.

The buyer should reconcile institutional records against actual operations.

Salary-Reporting Risk

The CCSS states that employers must report remuneration paid to workers and has continued investigating cases involving omitted or incorrectly reported salaries. In April 2025, the institution reported 1,962 complaints concerning salaries not correctly reported during the preceding three years.

The due-diligence review should therefore compare:

• CCSS payroll
• Internal payroll
• Bank transfers
• Commission reports
• Bonus payments
• Accounting ledgers
• Tax filings
• Employee interviews where appropriate

Differences require explanation.

What to Request From the Seller

Request:

• Current CCSS status certification
• Historical payroll filings
• Payment receipts
• Notices from the CCSS
• Inspection records
• Administrative resolutions
• Collection arrangements
• Salary-correction filings
• Correspondence with inspectors
• Records of omitted or newly registered employees

The buyer should not accept a one-page current certificate as the complete social-security review.

INS Occupational-Risk Due Diligence

Every employer must maintain occupational-risk insurance for its workers through the INS under Article 193 of the Labor Code.

The buyer should verify:

• Active policy
• Named insured
• Covered business activity
• Employee classifications
• Reported payroll
• Premium status
• Workplace claims
• Open cases
• Safety recommendations
• Excluded or omitted activities
• Historical lapses

The Policy Must Match the Actual Work

A policy may exist while remaining inaccurate.

For example, the target may report:

• Office workers who actually perform property maintenance
• Hotel workers classified only as administrative staff
• Farm employees omitted from the policy
• Drivers reported under a lower-risk category
• Construction or roofing work treated as general maintenance

The INS requires new workers to be reported before they begin work through the applicable occupational-risk system.

The buyer should compare the policy and payroll to:

• Job descriptions
• Actual duties
• Work locations
• Equipment used
• Vehicle use
• Prior accidents
• Safety records
• Open workplace claims

For each accident or occupational illness, review:

• Date
• Worker
• Reported duties
• Claim status
• Medical restrictions
• Return-to-work status
• Policy coverage
• Employer communications
• Potential retaliation concerns
• Required workplace corrections

An employee receiving treatment or returning with restrictions can become a significant post-closing management issue.

Payroll Due Diligence

The buyer should not merely verify that employees received money.

Payroll due diligence must determine whether they received every amount legally owed.

Review:

• Base salary
• Occupational minimum wage
• Ordinary hours
• Overtime
• Night work
• Holiday work
• Weekly rest-day work
• Commissions
• Bonuses
• Allowances
• Reimbursements
• Salary in kind
• Aguinaldo
• Vacation
• Deductions
• Income-tax withholding
• CCSS reporting

Our article on Costa Rica payroll rules explains minimum wages, schedules, overtime, holiday pay, variable compensation and the records employers should maintain.

Compare at Least Four Records

For each selected testing period, compare:

1. Time and attendance records
2. Payroll calculations
3. Bank or cash-payment evidence
4. CCSS and INS reporting

The figures should tell the same story.

When they do not, determine whether the difference reflects:

• A reimbursement
• A salary advance
• Unreported compensation
• Off-payroll overtime
• Cash commission
• A loan
• A bookkeeping error
• Intentional underreporting

Overtime Exposure

Overtime risk is especially high in:

• Hotels
• Restaurants
• Tourism operations
• Farms
• Security services
• Property-management businesses
• Retail
• Transportation
• Care services
• Businesses using after-hours WhatsApp communication

Review whether employees:

• Arrive before their recorded shift
• Stay after closing
• Work through meals
• Respond after hours
• Work holidays
• Cover absent coworkers
• Travel between work sites
• Perform unpaid opening or closing duties

A schedule showing no overtime is not credible when the operating hours exceed the available staffing coverage.

Vacation Due Diligence

Vacation is frequently one of the least reliable records in a small business.

The seller may say:

• “Everyone takes vacation when they want.”
• “We close for a week.”
• “Employees receive extra cash instead.”
• “They do not keep track.”
• “The manager remembers.”
• “No one has complained.”

Those statements are not a substitute for records.

Request Vacation Evidence

Review:

• Vacation ledgers
• Employee requests
• Approvals
• Payroll treatment
• Signed acknowledgments
• Scheduling calendars
• Remaining balances
• Termination calculations
• Company closure periods

Determine whether employees actually received the statutory rest and whether the recorded balances are credible.

Why Missing Records Matter

A buyer who retains employees may inherit disputes over years of allegedly unused vacation.

The purchase agreement should address:

• Agreed balances at closing
• Seller responsibility for inaccuracies
• Employee acknowledgments
• Financial reserves
• Post-closing corrections

Do not create false acknowledgments immediately before closing.

Aguinaldo Due Diligence

Review aguinaldo calculations for at least the relevant historical periods available.

Confirm that calculations included qualifying:

• Base salary
• Overtime
• Commissions
• Recurring bonuses
• Other remunerative payments

Compare the worksheets to actual payroll and proof of payment.

A seller may have paid one month of base salary each December without accounting for variable compensation.

That shortcut may understate the legal amount.

Our guide to employee benefits in Costa Rica explains the calculation and administration of aguinaldo, vacation, medical incapacity and protected leave.

Notice and Severance Exposure

A workforce has a termination value even when no termination is planned.

The buyer should calculate an estimated exposure for every employee based on:

• Original start date
• Current salary
• Average variable compensation
• Salary in kind
• Notice
• Cesantía
• Vacation
• Proportional aguinaldo
• Other accrued amounts

Article 29 uses a statutory schedule and limits ordinary cesantía to the final eight years.

Why a Severance Schedule Matters

The schedule helps the buyer understand:

• Cost of restructuring
• Cost of replacing management
• Cost of closing a division
• Cost of post-closing integration
• Value of retaining senior employees
• Appropriate escrow amount
• Purchase-price adjustment

A business with low physical debt may still carry substantial workforce-related exit costs.

Our detailed guide to terminating an employee in Costa Rica explains notice, severance, final settlements, for-cause dismissals and protected employees.

Salary in Kind: A Major Hidden Liability

Some of the most serious acquisition surprises arise from benefits that do not appear in cash payroll.

Potential examples include:

• On-site housing
• Subsidized rent
• Meals
• Personal vehicle use
• Fuel
• Utilities
• Private insurance
• Personal telephone service
• Farm products
• Other recurring benefits

Article 166 of the Labor Code defines salary in kind to include items received by the worker or family for immediate personal consumption, including food, housing and clothing. When the value has not been determined in the particular case, the statutory text provides a default estimate equal to 50% of the employee’s cash salary.

The 50% Rule Requires Careful Explanation

The statutory 50% valuation should not be described casually as though every company vehicle or free lunch automatically increases every employee’s salary by half.

The correct questions include:

• Is the benefit truly remuneration?
• Is it provided in exchange for services?
• Is it principally a work tool?
• Is personal use permitted?
• Has the benefit been expressly valued?
• Does a special rule apply?
• What does the evidence show?
• How has Costa Rican case law treated the specific benefit?

The default valuation becomes particularly dangerous when a genuine salary-in-kind benefit exists but the parties never established its value.

Costa Rican legal authority has explained that the 50% figure operates subsidiarily where no specific value has been determined.

Hotel Example

A hotel provides a manager with:

• Free apartment
• Three meals per day
• Vehicle and fuel
• Private insurance

The employment contract lists only cash salary and says nothing about the benefits.

After closing, the buyer terminates the manager and calculates notice and severance using only the cash salary.

The manager may argue that the recurring benefits were remuneration and should be included in the compensation base.

The dispute may then affect:

• Notice
• Severance
• Aguinaldo
• Vacation
• CCSS reporting
• Other salary-related calculations

Work Tool Versus Compensation

The buyer should distinguish between:

Work Tool

A vehicle used only for assigned company travel and returned after work.

Personal Benefit

A vehicle available for unrestricted private use, including weekends and family use.

Operational Meal

Food consumed during a required shift for practical workplace reasons.

Remunerative Meal Benefit

Regular meals provided as part of the employee’s agreed compensation.

The contract and actual use must match.

Protected Employees

The buyer should identify employees who cannot be treated as ordinary termination candidates.

Potentially protected situations include:

• Pregnancy
• Lactation
• Certain parental leave
• Union protection
• Sexual-harassment complainant status
• Occupational injury
• Medical incapacity
• Disability-related accommodation
• Other statutory or collective protections

The buyer must determine:

• What protection applies
• When it began
• Required authorization procedures
• Existing accommodations
• Leave dates
• Return-to-work obligations
• Pending complaints

A restructuring plan should not be finalized before this review.

Pregnancy and Lactation

A seller may disclose only that an employee is “on leave.”

The buyer needs sufficient lawful information to administer the relationship without demanding unnecessary private medical details.

A protected employee cannot simply be included in a general closing-day termination plan without reviewing the applicable authorization and reinstatement risks.

Workplace Injuries

An employee with an open INS claim may return after closing with:

• Medical restrictions
• Modified duties
• Follow-up appointments
• Disputed injury classification
• Retaliation concerns

The buyer should understand the claim before taking control of the workplace.

Pending Disputes and Inspections

Request a complete schedule of:

• MTSS complaints
• Conciliation proceedings
• Labor lawsuits
• CCSS inspections
• CCSS assessments
• INS claims
• Occupational-safety matters
• Discrimination complaints
• Harassment proceedings
• Internal grievances
• Demand letters
• Settlement negotiations
• Former employees threatening claims

Do not limit the request to formally filed lawsuits.

Many serious disputes are already visible through:

• Attorney letters
• WhatsApp messages
• Employee complaints
• Payroll objections
• Requests for CCSS registration
• Unresolved accident reports
• Repeated demands for overtime

Review Former Employees

Current staff are only part of the risk.

Request a list of employees and recurring contractors who left during the relevant review period, including:

• Start date
• End date
• Reason for departure
• Final settlement
• Termination letter
• Proof of payment
• Settlement or conciliation
• Pending complaint

A former employee may file a claim after closing even though the person does not appear on the current payroll.

Collective Agreements and Workplace Policies

Determine whether the business has:

• Collective bargaining agreements
• Union relationships
• Registered internal work regulations
• Employee handbooks
• Commission plans
• Bonus policies
• Vacation policies
• Remote-work arrangements
• Disciplinary procedures
• Established benefits exceeding the legal minimum

A buyer cannot assume every benefit can be removed after closing.

A longstanding or contractually established practice may form part of the employment relationship.

Compare Policy With Practice

A handbook may say overtime requires approval.

Actual managers may routinely demand unrecorded overtime.

A policy may say bonuses are discretionary.

Payroll may show the same formula paid every month.

The reality of administration matters more than an attractive document in the data room.

Documents for Labor Due Diligence

The buyer should request at least the following.

Workforce Information

• Full employee list
• Contractor list
• Former employee list
• Start dates
• Positions
• Work locations
• Schedules
• Salaries
• Variable compensation
• Benefits
• Protected status where lawfully relevant
• Accrued balances

Employment Documents

• Contracts
• Amendments
• Job descriptions
• Confidentiality agreements
• Commission plans
• Bonus plans
• Remote-work agreements
• Warnings
• Performance records
• Resignations
• Termination letters
• Settlements

Payroll and Time Records

• Payroll reports
• Payslips
• Bank files
• Cash-payment records
• Timesheets
• Attendance logs
• Overtime approvals
• Holiday schedules
• Vacation records
• Aguinaldo calculations

Institutional Records

• CCSS employer-status documents
• CCSS payroll filings
• CCSS payment receipts
• Inspection correspondence
• INS policy
• INS payroll reports
• Premium receipts
• Accident records
• Open claims
• MTSS communications

Financial and Tax Records

• General ledger
• Payroll expense accounts
• Contractor payments
• Electronic invoices
• Tax filings
• Accrued benefit accounts
• Severance reserves
• Related-party payments
• Reimbursement accounts

Policies and Disputes

• Workplace policies
• Internal regulations
• Collective agreements
• Harassment policy
• Safety procedures
• Pending complaints
• Lawsuit files
• Settlement agreements
• Attorney correspondence

Employee Interviews

In higher-risk transactions, carefully structured employee or management interviews may reveal matters not visible in the records.

Questions can address:

• Actual schedule
• Overtime
• Payment method
• Duties
• Reporting lines
• Vacation
• Benefits
• Start date
• Contractor treatment
• Housing and meals
• Workplace injuries
• Complaints

Interviews should be coordinated carefully.

The buyer should not:

• Promise continued employment without authority
• Threaten employees
• Ask discriminatory questions
• Encourage false answers
• Disclose confidential deal terms unnecessarily
• Alert the workforce prematurely where confidentiality is required

Quantifying Labor Exposure

The due-diligence report should not stop at identifying problems.

It should estimate financial impact.

Create an exposure schedule for:

• Unregistered employees
• Misclassified contractors
• Underreported salaries
• Overtime
• Vacation
• Aguinaldo
• Commissions
• Salary in kind
• Notice
• Severance
• CCSS
• INS
• Pending claims
• Legal defense costs
• Post-closing remediation

Use ranges where exact calculations are impossible.

The buyer needs enough information to decide whether to:

• Proceed
• Renegotiate
• Require correction
• Increase escrow
• Reduce price
• Change structure
• Exclude liabilities
• Walk away

Purchase-Price Holdbacks and Escrow

A seller’s promise to pay future claims may be insufficient.

Labor problems can surface after:

• Employee termination
• Institutional inspection
• Closing-day management changes
• Expiration of the six-month joint-liability period
• Discovery of missing records
• Workplace injury
• Former-employee demand

The buyer may therefore require part of the price to remain in escrow or be held back.

Factors Affecting the Holdback

Consider:

• Number of employees
• Seniority
• Quality of records
• Contractor exposure
• CCSS findings
• INS deficiencies
• Pending disputes
• Seller creditworthiness
• Expected restructuring
• Salary-in-kind benefits
• Six-month Article 37 period
• Contractual claim-survival periods

There is no universal percentage appropriate for every transaction.

The amount should follow the quantified risk.

Labor Indemnities

The purchase agreement should include specific labor representations and indemnities.

Potential subjects include:

• Complete employee list
• Complete contractor list
• Accurate start dates
• Payment of salary
• Overtime compliance
• Vacation
• Aguinaldo
• CCSS registration
• Accurate salary reporting
• INS coverage
• Workplace claims
• Protected employees
• Labor disputes
• Salary in kind
• No undisclosed collective obligations
• No unauthorized promises to employees
• Pre-closing termination liabilities

General language stating that the seller complied with “all applicable laws” is useful but often too broad to manage a specific known risk.

Known Issues Should Receive Specific Treatment

If due diligence identifies unregistered workers, the agreement should state:

• Who corrects registration
• Who funds historical amounts
• Whether employees will remain
• Whether settlement is required
• Amount held back
• Claims procedure
• Control of institutional proceedings
• Cooperation duties

A generic indemnity should not replace a concrete remediation plan.

Seller Covenants Before Closing

Between signing and closing, require the seller to avoid:

• Hiring workers without consent
• Increasing salary unexpectedly
• Promising bonuses
• Changing contractor classifications
• Terminating employees improperly
• Altering benefit plans
• Destroying records
• Settling disputes without approval
• Changing CCSS or INS reporting
• Creating new salary-in-kind benefits

The buyer does not want the workforce risk to change materially while the transaction is pending.

Closing-Day Workforce Plan

Before closing, identify every worker and decide:

• Continue under employer substitution
• Receive new employment offer
• Terminated by seller
• Terminated after closing
• Converted from contractor to employee
• Retained as genuine contractor
• Reassigned
• Subject to special protected-status procedure

Prepare:

• Employee communications
• Contracts or amendments
• Payroll migration
• CCSS administration
• INS reporting
• Bank-payment transition
• Benefits continuation
• Vacation balances
• Manager instructions
• Access and security changes

The legal transaction may close in one day.

The employment transition cannot be improvised that morning.

Post-Closing Audit

During the first 30 to 90 days, compare due-diligence information to reality.

Verify:

• Every person working on site
• Actual hours
• Actual duties
• Contractor independence
• Payroll components
• CCSS reporting
• INS classification
• Vacation balances
• Salary-in-kind use
• Protected employees
• Pending complaints

Employees may disclose problems only after the seller leaves.

Early correction is easier than waiting for a termination or inspection.

Do Not Immediately Change Everything

Buyers often arrive with new rules, software and management practices.

Rapid changes can create:

• Unilateral reduction of benefits
• Schedule disputes
• Overtime
• Constructive-dismissal allegations
• Retaliation concerns
• Evidence that prior conditions were different
• Employee resistance

Review the legal effect before changing:

• Salary
• Commission plans
• Schedule
• Work location
• Housing
• Vehicle benefits
• Remote work
• Duties
• Reporting lines
• Vacation practices

Common Transaction Scenarios

Buying a Hotel

Review:

• Reception schedules
• Night shifts
• Holiday work
• Meals
• Housing
• Tips
• Maintenance workers
• Tour contractors
• Managers with vehicles
• Seasonal staff
• Open INS claims

Buying a Restaurant

Review:

• Split shifts
• Overtime
• Tips
• Cash payroll
• Kitchen injuries
• Holiday work
• Delivery drivers
• Family workers
• Service-charge treatment
• Staff meals

Buying a Farm

Review:

• Seasonal workers
• Housing
• Food
• Land provided for use
• Machinery risk
• Contractor crews
• Migrant-worker documentation
• Underreported salaries
• Occupational injuries
• Transportation

Article 166 expressly includes certain land provided to agricultural or livestock workers within salary-in-kind rules.

Buying a Property-Management Company

Review:

• On-site caretakers
• Maintenance contractors
• Housekeepers
• Workers paid by owners
• Workers paid through the manager
• Employer ambiguity
• Multiple legal entities
• Vehicle use
• Weekend availability
• Remote-owner instructions

Buying a Vacation-Rental Operation

Review:

• Whether cleaners are domestic workers or business employees
• Recurring gardeners
• Guest-service staff
• After-hours communications
• Property-specific payroll
• Workers employed by individual owners
• INS coverage across locations
• Misclassified contractors

The Hidden Liability Most Likely to Surprise a Buyer

The most surprising exposure is often not the visible base payroll.

It is the difference between recorded cash salary and the employee’s legally relevant total remuneration.

That difference may include:

• Housing
• Meals
• Personal vehicle use
• Fuel
• Recurring bonuses
• Cash commissions
• Unreported overtime
• Regular allowances

The buyer calculates labor costs using the payroll spreadsheet.

The employee calculates rights using the real relationship.

Costa Rican labor law generally gives substantial importance to that real relationship.

Buyer’s Labor Due-Diligence Checklist

Before Signing

• Identify the employer entity.
• Obtain complete worker lists.
• Review employee and contractor classification.
• Examine Article 37 continuity risk.
• Calculate seniority.
• Verify CCSS status and payroll.
• Verify INS policy and claims.
• Test payroll against bank payments.
• Review overtime and schedules.
• Review vacation and aguinaldo.
• Identify salary-in-kind benefits.
• Review protected employees.
• Review current and former employee disputes.
• Estimate termination exposure.
• Quantify high-risk liabilities.

Before Closing

• Resolve known registration issues.
• Decide who retains each worker.
• Prepare employment communications.
• Confirm settlement calculations.
• Establish escrow or holdback.
• Draft specific indemnities.
• Preserve records.
• Transfer payroll administration.
• Update INS and CCSS processes.
• Train incoming managers.

After Closing

• Audit the real workforce.
• Compare actual duties to records.
• Reconcile the first payroll.
• Review contractor relationships.
• Confirm vacation balances.
• Correct institutional reporting.
• Preserve seller cooperation rights.
• Avoid immediate adverse changes without review.

When to Obtain Legal Help

A labor due-diligence review is especially important when:

• The transaction includes an operating workforce.
• Employees have long seniority.
• The seller uses many contractors.
• Cash payroll exists.
• The business provides housing or meals.
• Employees use company vehicles personally.
• CCSS records do not match payroll.
• The INS classification appears inaccurate.
• Vacation records are incomplete.
• The buyer plans immediate terminations.
• Protected employees are present.
• Labor complaints or injuries are pending.
• The transaction uses an asset structure but continues the same business.
• The seller proposes termination and immediate rehiring.
• The buyer is purchasing a hotel, restaurant, farm or property-management operation.

The review should occur before the purchase price and transaction structure are finalized.

The Expat Database’s article on the importance of due diligence when purchasing a business in Costa Rica also emphasizes completing an organized and exhaustive review before deciding whether to proceed with an acquisition. (The Expat Database)

Frequently Asked Questions

Do Labor Liabilities Remain With the Company After a Share Purchase?

Generally, the employer company remains the same legal entity, so its historical employment obligations remain with it even though its shareholders change.

Does an Asset Purchase Avoid Labor Liabilities?

Not automatically. Continuing the same economic operation with the existing workforce may create employer-substitution and continuity issues.

What Does Article 37 Provide?

It states that employer substitution cannot prejudice existing employment contracts. The former and new employers are jointly responsible for certain pre-substitution obligations for six months, after which responsibility remains with the new employer.

Does Employee Seniority Restart at Closing?

Not necessarily. Where employment continues through employer substitution, historical seniority may remain relevant.

Should the Seller Terminate Every Employee?

That may be appropriate in some transactions, but it is not an automatic solution. The parties must consider whether employment genuinely ends or continues in substance.

Does Paying a Complete Settlement Erase Continuity?

Not necessarily. Payment addresses accrued financial obligations, but the facts may still support continuity when the same employment resumes immediately in the same operation.

Can the Buyer Rely on a CCSS Patrono al Día Certificate?

The certificate is important but not sufficient. It may not reveal omitted workers, underreported salaries, misclassified contractors or future assessments.

What CCSS Records Should Be Reviewed?

Review current status, historical payroll filings, payments, inspections, salary corrections, collection arrangements and correspondence.

What INS Records Should Be Reviewed?

Review the policy, activity and employee classifications, payroll reports, premiums, accidents, open claims and coverage history.

Can Contractors Create Inherited Labor Exposure?

Yes. A contractor who functioned as an employee may claim retroactive benefits and social-security treatment.

What Is Salary in Kind?

Article 166 includes qualifying non-cash remuneration such as food, housing, clothing and similar items intended for personal consumption.

Does Every Benefit Automatically Increase Salary by 50%?

No. The 50% statutory estimate applies when a genuine salary-in-kind benefit exists and its value has not otherwise been determined in the specific case. Whether a benefit is remuneration must be analyzed first.

Is Severance Always One Month per Year?

No. Article 29 applies a statutory schedule and generally limits ordinary cesantía to the final eight years.

Should the Buyer Calculate Severance Even When No Layoffs Are Planned?

Yes. The calculation helps quantify workforce exit costs and informs price, escrow and restructuring decisions.

What Is the Purpose of an Escrow Holdback?

It preserves funds that may be used if historical labor claims or institutional assessments arise after closing.

Is a Seller Indemnity Enough?

Not always. An indemnity is only as useful as its wording, duration, claims procedure and the seller’s ability to pay.

Can the Buyer Interview Employees During Due Diligence?

Potentially, but interviews should be coordinated carefully to protect confidentiality, avoid promises and comply with employment and privacy considerations.

What Is the Most Important Due-Diligence Rule?

Do not analyze only who appears on payroll today. Identify everyone who has actually worked for the operation, how they were managed and what obligations may have accumulated.

Legal information notice: This article provides general information about labor due diligence and employer substitution in Costa Rica. It does not constitute legal, tax or transaction advice for a specific acquisition. Liability depends on the transaction structure, operational continuity, employment facts, contractual protections and current law.

Last reviewed: July 2026